Key Takeaways
- SOC 1 vs. SOC 2 vs. SOC 3 is determined by risk, control testing, and who the audience for the reports is.
- A SOC 1 report includes controls pertinent to the customer’s financial reporting, whereas SOC 2 includes controls relating to security and other criteria under the Trust Services Criteria.
- SOC 3 is a condensed version that can be used by the general public.
When clients evaluate whether to outsource financial functions, share confidential data, and trust important systems with a vendor, they examine the controls of that vendor. While the report of the System and Organization Controls (SOC) provides an independent evaluation of selected controls, these reports cannot be substituted for each other. Knowledge of the scope, purpose, and depth of each of these reports allows organizations to comply with customers’ needs without selecting an improper type of audit.
This guide explains the SOC 1 vs. SOC 2 vs. SOC 3 differences, their benefits, challenges, and preparation steps.
What is a SOC Report?
SOC report refers to an independent CPA’s audit of the controls of the service organization. It involves the description of the system under evaluation, controls developed by the management, and the audit opinion on the engagement. The report is used by customers to assess the risks related to their outsourced services.
A report is not just a standard security certification; it does not guarantee that there are no risks in the business. It is about a particular system and period, which means that one must assess the scope of the report, exceptions, complementary controls, and subservice organizations. Different SOC reports exist depending on the customer’s risk assessment needs.
What is a SOC 1, SOC 2, and SOC 3 Report?
A SOC 1 report is a report that looks at the controls related to the internal control over financial reporting of the user entity. This is important when the work done by a service organization may affect the customer's financial statements, such as payroll processing, transaction processing, and claims processing.
A SOC 2 report tests controls in relation to the AICPA Trust Services Criteria, which include security, availability, processing integrity, confidentiality, and privacy. The common element is security, while others apply depending on the service organization's commitment and the system being evaluated. SaaS organizations, cloud providers, and companies processing customers' data use SOC 2 in order to show risk management.
A SOC 3 report provides a less detailed report on controls tested under applicable Trust Services Criteria, such as SOC 2. It is more broadly available than SOC 2 and may be distributed to a broader audience, such as prospects, who need only a general report.
SOC 1 and SOC 2 engagements may involve Type 1 or Type 2 reports. Type 1 involves testing the design of controls at the specified date, whereas Type 2 involves testing the design and operating effectiveness over a period.SOC 3 report is a general report and should not be assumed to provide the same detailed evidence as SOC 2.
Also Read: SOC 2 Compliance Checklist for Stronger Data Security Today
What is the Difference Between SOC 1, SOC 2, and SOC 3
The main distinction lies in the risk that is being assessed and the amount of information known to the reader. Use this table as a guide, and then get confirmation from your customers and auditor on what is really required.
| Comparison | SOC 1 | SOC 2 | SOC 3 |
| Primary focus | Controls related to financial reporting | Security and some selected Trust Services Criteria | Security and some selected Trust Services Criteria |
| Primary audience | Customers and auditors who are assessing the risk of financial reporting | Customers, procurement and security personnel | Prospective customers and the general public |
| Detail provided | In-depth and confidential report | In-depth and confidential report | Summary for general use with less detail |
| Common users | Payroll, transaction processing, benefits administration | SaaS, cloud, managed IT, data processing | Providers communicating assurance publicly |
| Report types | Type 1 or Type 2 | Type 1 or Type 2 | General-use report |
SOC 3 should not be chosen merely because it is easy to disseminate. The customer evaluating security controls might find SOC 2 and all the details accompanying it necessary. Moreover, SOC 2 does not automatically supersede SOC 1, especially in cases where financial reporting controls are at issue. It can be the case that organizations need both SOC reports, since their services carry different types of risks.
Benefits of SOC 1, SOC 2, and SOC 3 Reports
Each report can support customer confidence, but its business value depends on whether it answers the questions stakeholders are asking.
Benefits of SOC 1 Report
SOC 1 engagement allows service providers to confirm that controls that may affect the customers’ financial reporting have been tested. This will help with vendor reviews, enhance understanding of financial processes, and allow customers to evaluate the risk of outsourcing. The SOC 1 report is particularly important for payroll processing vendors, transaction processors, and financial data management.
Benefits of SOC 2 Report
SOC 2 compliance increases the trust of clients who are relying on their vendor’s ability to safeguard their information and adhere to service commitments. The SOC 2 report ensures that teams document policy, identify control owners, manage access, manage incidents, and remediate gaps. The report will also be helpful in sales and procurement discussions, but does not ensure that incidents do not happen or requirements are fully met.
Benefits of SOC 3 Report
SOC 3 gives organizations a way to communicate assurance to a broader audience without distributing the detailed report. It can support marketing and initial vendor conversations, while customers requiring deeper evidence can request the appropriate restricted-use report.
SOC 1, SOC 2, and SOC 3 Audit Challenges
SOC audits require preparation, documentation, staffing, and coordination. A common problem with scoping is determining what belongs within the boundary of the system. Without inclusion of all relevant applications, resources, sites, and third-party providers, the resulting report might fail to address a customer's concern.
Scoping SOC 1 audits can be complicated since the audit team needs to determine which controls could impact the client's financial reporting processes. In SOC 2, there should be collaboration among security, IT, HR, operations, and senior management; documentation should show the implementation of controls rather than just policies. SOC 3 involves the same underlying controls as SOC 2 audits, despite the difference in their reports.
Among other problems are unorganized or non-standard evidence, lack of ownership, lack of review of access rights, and open remediations. Scope should be determined early, evidence kept organized, and exceptions discussed clearly with the auditor. Tools for compliance might assist in keeping track of the controls and evidence, but do not substitute for management responsibility and auditor judgment.
How to Choose the Right SOC Audit for Your Business?
Begin by identifying the customer risks that your service creates. In case your service affects the accounting of the customer, SOC 1 is something to check out. In case you access, store, or process the data of your customers or the service obligations include security and availability of the systems, SOC 2 might suit better. SOC 3 would suit if you are willing to have a public document on the controls evaluated according to the Trust Services Criteria.
It is necessary to consult customers about the required report, the system and services that need to be included in the scope, and whether it is Type 1 or Type 2. After reviewing the contracts and procurement questionnaires, it is time to discuss the proposed scope with a certified CPA firm.
For a SOC 2 program, SOC 2 compliance software may help organize evidence, monitor control tasks, and track readiness. Evaluate a platform against your existing tools, reporting needs, and team workflow. AttestPath.ai is one option to review if you want to automate SOC 2 compliance.
How to Prepare Your SOC 2 Report?
Getting ready for a SOC 2 report is easier if you approach it as a continual control process and not just documentation.
First, identify the services, systems, locations, and data within scope. Decide on the appropriate Trust Services Criteria depending on your customer commitments and risks. Next, conduct a readiness assessment to understand any gaps that exist between your existing controls and those needed.
Assign ownership of each control and provide evidence that it is implemented. This may include access reviews, hiring and termination policies, tests of incident responses, change management approval, risk assessment, vendor review, system monitoring, and other processes. The policies must be reflective of the process; otherwise, creating a new policy without implementing it will create a gap rather than resolve one.
Remediate gaps and document decision-making, along with establishing a regular review cycle for evidence gathering. Coordinate with the auditor in advance of the actual audit process in terms of timing, scope, and expected evidence. In the case of Type 2, the controls have to operate throughout the time frame of your observation, so it is important to start early. Continue with the process after the report issuance as well.
Conclusion
The decision on whether SOC 1, SOC 2, or SOC 3 is appropriate depends on understanding what assurances the clients require. SOC 1 applies to controls that are related to financial reporting, SOC 2 involves a detailed assessment of controls regarding the Trust Services Criteria, while SOC 3 presents a less-detailed report intended for wider distribution. The scope should be confirmed with the clients and an independent auditor; controls should be prepared before the audit, and the report should be used as an indication of a continuous process.
Frequently Asked Questions
Who needs a SOC 1, SOC 2, and SOC 3 report?
Different organizations require different reports, depending on their offerings and customers' expectations. Payroll and transaction processing companies might require SOC 1; SOC 2 applies to SaaS, cloud, and managed service providers; and SOC 3 can be published if a company wants to share its assurance. It depends on the customers' contractual agreements.
When should I get a SOC report?
The right time is when customers demand assurance, entering a market that requires reports, or getting ready for a significant procurement activity. Audits require time, particularly if controls have to be improved. Starting early will help avoid problems related to delayed sales and vendor onboarding.
Is SOC 2 more beneficial than SOC 1?
It's not true. SOC 1 deals with controls necessary for the customers' financial reporting, whereas SOC 2 relates to security and other criteria under the Trust Services Criteria. Everything depends on your customers' risks and requirements.
Can a company have both SOC 1 and SOC 2?
Yes. A service provider may affect customer financial reporting while also storing sensitive data or operating critical systems. In that case, separate engagements or appropriately scoped reporting may be needed to address both sets of risks.
Does a SOC report guarantee that a company is secure?
No. A report covers defined controls, systems, and a specific date or period. Readers should review its scope, opinion, exceptions, and period covered, and consider whether the controls address their particular risks.
